If a country wants to keep its exchange rate fixed, it must
A) allow its currency value to vary with market supply and demand in foreign exchange markets.
B) be a member of the IMF.
C) vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary.
D) eliminate its foreign exchange reserves.

Question

Quizplus · Accepted Answer

To keep its exchange rate fixed, a country must vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary. This means that the country must intervene in foreign exchange markets by buying or selling its currency to maintain the fixed exchange rate. The amount of currency supplied may need to be adjusted depending on market conditions and demand for the country's currency. A fixed exchange rate regime requires active management by the country's central bank, rather than allowing the currency value to vary freely with market supply and demand. Membership in the IMF is not required to fix the exchange rate, and eliminating foreign exchange reserves would make it difficult to intervene in foreign exchange markets if necessary.

If a Country Wants to Keep Its Exchange Rate Fixed